A healthy cover for the future

The government on Monday announced a slew of measures for the life insurance sector aimed at simplifying procedural hassles and deepening penetration. A lowdown on what lies ahead.

What’s there in it for the consumer in the government’s plans for the life insurance sector?

For starters, the government is examining the possibility of offering additional tax benefits to savers, who choose to park their funds in pension products that insurance companies offer. At present, all schemes, including those categorised as retirement benefits that insurance firms offer, are clubbed together with all products for claiming tax deduction of up to Rs 100,000 a year under Section 80 C of the Income Tax Act. Individuals, however, can claim additional tax deduction over and above the Rs 100,000 limit for savings in National Pension System (NPS) and some medical insurance products. On Monday, the government said that even pension products offered by insurance companies are likely to be allowed additional tax benefits similar to NPS.

How will it help individuals?

This will give an additional tax savings option to individuals who are keen on investing in retirement benefits apart from those offered by the NPS.

How will it help insurance firms?

Pension products, by definition, are long-term schemes that spread over decades. Additional tax deduction for such policies will enable insurance firms to dig deeper into household savings, improving solvencies and allow them greater elbow room to deploy funds more productively.

How can long-term savings of individuals help the economy?

India is in dire need of resources to fund its infrastructure projects to build highways, ports, airports and railways. Creating a well-developed and regulated pensions and insurance market can ensure that thrifty Indians can bridge the cash deficit for India’s infrastructure sector to a large extent.

How can infrastructure firms get access to household savings?

Frugal households could well turn out to be the primary financiers of these mammoth projects. India’s savings rate could reach 40% of GDP in the next few years and can potentially be sustained at high levels for well over a decade, primarily due to huge number of young people entering the workforce. International experience shows that pension funds and insurance companies have helped jump-start infrastructure investment in several countries including Australia, Canada, Mexico and Chile.

But how will pension and insurance funds find their way into infrastructure projects?

On Monday, the government has said sector watchdog Insurance Regulatory Development Authority (IRDA) will allow insurance firms to invest in an infrastructure special purpose vehicles (SPV) floated by any company. This will enable long-term pension and insurance funds that firms collect to be deployed in long-gestation infrastructure projects.

What are the other tax concessions that the government plans to offer for the insurance sector?

The government is looking at the possibility of exempting first year premium from service tax. It is also examining whether the first year premium and subsequent premiums of social security insurance schemes such as Janashri Bima Yojana (JBY) and Aam Aadmi Bima Yojana (AABY), may be exempted from service tax. The Central Board of Direct Taxes (CBDT) will also examine whether contribution made to post retirement medical scheme offered by insurance companies be allowed for tax deduction. At present, tax deduction at source (TDS) applies on every payment of commission to an agent above Rs 20,000. CBDT will examine whether the exemption can be shifted from every payment of commission to a cumulative commission payment exceeding, say, Rs 50,000 or any other suitable threshold in a year.

By when can we expect the government to announce the decision on tax incentives?

The department of revenue, the CBDT and the Central Board of Excise and Customs (CBEC) will complete the examination of the tax benefits by October 10, so that appropriate decisions may be announced shortly thereafter.

Apart from tax breaks, what other measures have the government announced to boost the life insurance sector?

Besides tax breaks, IRDA will allow “use-and-file” system for insurance products to increase spread and penetration of products, as opposed to the current file-and-use method. File-and-use allows the insurer to introduce new products after filing with the regulator. Use-and-file law allows the insurer to introduce products, which will be deemed to have been approved after 15 days of its intimation to IRDA.